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Listen to Deductions from Compensation.

This week on Hull on Estates and Succession Planning, Ian and Suzana finish up the discussion on the question of accounting by reviewing deductions from compensation and briefly sum up the procedure of the passing of accounts.

Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.

Deductions from Compensation - Hull on Estate and Succession Planning Podcast #125

Posted on August 12, 2008 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You’re listening to Episode #125 of our podcast on Tuesday, August 12^th, 2008.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada. From the offices of Hull Estate Mediation in Toronto, Ontario, Canada, here are Ian and Suzana.

 

Suzana Popovic-Montag: Hi there, Ian.

Ian Hull:  Hi, Suzana. How are you doing?

Suzana Popovic-Montag: I’m good thank you, how are you?

Ian Hull: Just great. We’re having some fun with this whole question of accounting, and I think I’ve done the numbers, and I think we’re almost done. But before we go through our podcast today, let’s remind everyone, please feel free to call in on our call-in number and our call-in number is of course, 206-457-1985.

Suzana Popovic-Montag: Or send us an e-mail at hullandhull@gmail.com or of course, you can visit our blog at estatelaw.hullandhull.com as well. 

Ian Hull: So before we launch into the substantive podcast today, I just wanted to do a couple of things. One, I want to deal with an e-mail that came in and another is I want to just welcome people to listen and look at the, last week we enjoyed Jordan Atin who is our associate counsel here, our Senior Associate Counsel, and he was on Canada AM for four days in a row talking about family feuds and the link to the webpage where CTV is still running the streaming is worth looking at, and we’ll make sure that’s in our show notes.  But Jordan had a great opportunity to talk about family feuds and sort of the issues that arise out of his book, “The Family War” which is co-written by Les Kotzer and of course, my good friend, Barry Fish.

Alright, so we were talking about some of the e-mails. And we had two e-mails last week come in. Both of them were semi-related and so I’m sort of going to merge the two of them together. And the question really comes down to this:  What are we talking about with The Shoebox Effect? And what we’ve been mentioning in the past and what we’re going to talk a little bit about today, because part of our wind-up is the importance of vouchers, is The Shoebox Effect is this. When you are a trustee, no matter what you think, no matter what you do, you will be someday possibly asked to show your receipts and that’s all I’m saying The Shoebox Effect is. Make sure you keep receipts, even if it’s in a shoebox. Your lawyer or your accountant can work on the presentation of it when you ultimately have to go to Court, but keep the receipts. So that was the two questions that came in, actually, both were from different parts of Canada but asking about the same question. So I’m not going to dwell on it other than that and say that when we’re winding up our comments on accounting, please, please, please keep your receipts if you’re a fiduciary.

Suzana Popovic-Montag: And just to add one thought to that, Ian, I would also suggest that it’s really helpful to make sure that you document as much as possible everything that you do as a trustee.  And when it comes to exercising your discretion, and if particularly the Will or the trust document allows you to have a broad discretion, to write down your thoughts or your reasoning or the underlying reasons that you decided to do something or not do something and include that in the shoebox that you end up bringing to a lawyer one day possibly.

Ian Hull: That’s a great suggestion and it comes down to, when we’re talking about getting paid for all of these efforts, the deductions from compensation that we briefly talked about in the last podcasts, what can you look to? So we talked about that you can get paid, say approximately 5% as a tariff, so to speak.  And we’ve talked about some of the things we’re going to knock you out from, but one of the easy deductions is the delineation between the executor’s work and lawyer’s work or accountant’s work. And that ties into your comment, Suzana, on docketing, keeping records beyond just the receipts that I talked about.

Suzana Popovic-Montag: And things for instance, like the preparation of tax returns, when fees are associated with that, depending on who’s preparing the tax returns and how much those fees are, that’s another thing that might possibly be a deduction from compensation if the trustee for instance is an accountant. And these are situations where a trustee is an accountant or a lawyer that you see most often, where these issues can arise.

Ian Hull: Alright, so another concern that we raise and probably the last deduction from compensation we’ll just mention now, is this whole idea of pre-taking compensation. Under Ontario legislation, if you’re a fiduciary or, as I say, a guardian under the Substitute Decisions Act, they actually allow you to pre-take your compensation, take before you’ve made your efforts. But we’ve talked about in the past the cases, and we’ve talked about them in the show notes as well, the case law that talks about Re: Knoch which we talked about in our previous podcast and others, and we want to be very, very careful about pre-taking, getting paid before you’ve done your work. So that’s an easy deduction.

Suzana Popovic-Montag: Ian, just a question that I find often gets asked is whether or not GST is actually payable on executor’s compensation. What are your thoughts about that?

Ian Hull: Well, that’s a great question and it’s a murky area of the law.  And what has happened in the past is you would typically have to look at it case by case. First and foremost, you have to look at the amount of the payment that the compensation is. If it is over $30,000 that you’re being paid in compensation, which could be the case because it’s typically a one-time payment, you may have to pay GST on that income as having rendered services. So it’s really case-by-case. Talk to your accountant, get good advice before you wrap up that issue, but that’s an excellent question and a really important heads-up for people who are accounting and doing compensation work.

Okay, I think we’ve pretty well covered off our accounting in the in-depth form and so we wanted to make sure that we stayed the course and came full circle to our sort of checklist that we’re trying to work through. And one of the things I will say is we’re hopefully going to be changing our format and trying to pick up a video feed for our podcasts which is in the process. Some technology glitches haven’t allowed for it to fall in just yet, but we’re going to be moving into some different topic areas. But one of the topic areas that we have to, I think, just sort of at least wrap up in a minimum way, is the process itself. We’ve talked about the passing of accounts process but let’s talk about the physical steps that are taken because many people don’t understand passing of accounts and what you can expect in the courtroom once we’ve got the Court format accounts.  And my introduction to this, by way of the fact that we’re going to be moving this into an audio, is that we’re going to have our own mini-series on this issue, where we’re really going to flush out these topics.  But I think its worthwhile talking about them briefly now, so that people understand what they’re going to get themselves into once they’ve got these beautifully created Court format accounts.

Suzana Popovic-Montag: And procedurally speaking, certainly here in Ontario, the Rules of Civil Procedure will govern what is included in an Application to pass the Court format accounts. And we started when, before we got into this discussion of how we would audit estate accounts or how to prepare a best kind of set of accounts in the circumstances, we talked about the fact that it’s all part of an application process.  And so there will be an actual Court date that’s assigned to the hearing for the return of the executor’s accounts, and you’ll serve a Notice of that application on all the beneficiaries together with, in many circumstances and many situations, a copy of the accounts as well. And the Rules themselves specifically provide what has to be in this Application record and I thought, Ian, it might be good to just sort of flush out some of those specific requirements.

Ian Hull: Alright. Well I think and it’s helpful because it’s not quite as daunting when you get the document itself thrown at you because, as I say, a lot of these accounts are passed in a non-contentious environment.  But it’s legal mumbo-jumbo to some people so you want to make sure you sort of know what you’re getting yourselves into when you get it. And the main document behind the accounts is the Affidavit verifying the accounts, they’re proving that you’re swearing to the truth of the accounts, and that’s the fiduciary sort of statement that says these accounts are true and accurate.

Suzana Popovic-Montag: And that Affidavit, as I say, is included in the record that is served upon everyone who has a financial interest in the estate. And financial interest in the estate I think we’ve talked about on previous podcasts, has a very broad meaning in the sense that even people with a contingent interest in an estate will be served with the accounts as well.

Ian Hull: And talking about service, we don’t want to forget that there may be government agencies that we have to serve, of course; the Office of the Children’s Lawyer should there be any minor child’s interests, or interests of those who are unborn and unascertained.  And without getting too technical about it, we just want to look at the trust document or the Will and see if there is a trust. And typically if there’s a trust, more often than not, almost certainly in fact, the Children’s Lawyer would be served, that’s the Office of the Children’s Lawyer.  And it’s different in each Ontario jurisdiction, but basically the lawyer in charge of minor interests. Another person to be concerned about serving is

Suzana Popovic-Montag: the Public Guardian and Trustee. That office would be served on behalf of any incapable beneficiaries of the estate. And so just like the Children’s Lawyer protects the minor, the unborn or the unascertained, the Public Guardian and Trustee here in Ontario will represent those incapable beneficiaries.

Ian Hull: So those are just things to keep a heads-up on so that you don’t get out of the box and miss a page of the application process by not putting important entities on notice. Obviously, we come back to our cardinal rule: Read the document, read the Will, read the trust and make sure you’ve served everyone named in that, but the Public Guardian and Trustee and the Office of the Children’s Lawyer, are two entities that aren’t necessarily named and quite often aren’t named, so just a heads-up. 

So I think that gives you sort of a sense of what the document itself, in a friendly environment will be, so I think we’ll wrap up today’s podcast and again reminding you, please feel free to e-mail at hullandhull, h u l l a n d h u l l @gmail.com.

Suzana Popovic-Montag: Or feel free to call and leave us an audio comment at 206-457-1985. Thanks very much, Ian.

Ian Hull: Thanks, Suzana.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

 

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

 

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

 

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As I am sipping on my coffee this morning, I am thinking to myself, who can commence a will challenge? 

A will challenge can be commenced pursuant to 75.06(1) of the Rules of Civil Procedure. Rule 75.06(1) is a procedural remedy that permits any person who appears to have a financial interest in an estate to apply for directions or move for directions in another proceeding.   This begs the question, who is considered to have a financial interest in an estate? This issue was addressed in the Ontario Superior Court (Divisional Court) decision of Smith v. Vance.

In Smith, the Deceased died on October 27, 1995, leaving a will dated January 5, 1994 which named the applicants as the estate trustees.   A notice of objection was filed by three individuals who were cousins of the deceased through marriage. The objection was subsequently struck by the Honourable Justice Perras during the motion for directions on the grounds that the objectors did not have a financial interest in the subject-Estate. In this hearing, the objectors appealed this decision.

The objectors asserted their financial interest in the Estate based on their close relationship with and their physical and financial assistance for the deceased. There was also an earlier destroyed will in which the objectors were named beneficiaries. Finally a letter was allegedly written by the deceased wherein she acknowledged that the objector will have an interest in her estate.

The court acknowledged that a financial interest is not defined in the Rules of Civil Procedure. In such cases, words should be taken by its natural meaning. Black's legal dictionary defines financial interest as an interest equated with money or its equivalent. The court held that claimants must do more than simply assert an interest. They must present sufficient evidence of a genuine interest and meet a threshold test to justify inclusion as a party. The interest need not be conclusive evidence at that stage but must be evidence capable of supporting an inference that the claim is one that should be heard. 

If the evidence offered by an objector is capable of supporting an inference that the claim raises a genuine issue, and thus is one that should be heard, the objector is entitled to standing and should be granted permission to be added as a party. The appeal was allowed and the order by the Honourable Justice Perras was set aside.

I hope you had fun reading today's blog. Until tomorrow,

Rick Bickhram

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Listen to The Question of Compensation and Complaints.

This week on Hull on Estates and Succession Planning, Ian and Suzana discuss the question of compensation and complaints regarding compensation.

Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estate and Succession Planning blog.

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In yesterday’s blog, I mentioned that the election of the Ontario Bar Association (OBA), Trusts and Estates Section Executive for the year 2008-2009 was confirmed at the Sections’ year end dinner on May 27, 2008.

Kimberly Whaley is the incoming Chair of the Executive with Suzana Popovic-Montag as Vice-Chair. The balance of the slate is as follows:

Past-Chair: Jordan Atin
Secretary: Craig Vander Zee

Members-at-Large: Ann Elise Alexander, Robert Coates, Vincent De Angelis, Shael Eisen, Ed Esposto, Jan Goddard, Eric Hoffstein, Danielle Joel, Sean Lawler, Mitchell Leitman, Helena Likwornik, Jane Martin, Joanna Ringrose, Liza Sheard, Susan Stamm, Dina Stigas, Sender Tator, Mary Wahbi, Laura West and Melanie Yach.

I look forward to again working on the Executive and having a successful year.

Before turning the page on this past year, though, I would like to sincerely thank Jordan Atin for all of his efforts, hard work and counsel as the Chair of the Executive.

Have a nice day.

Craig

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Listen to Issues in Estate Administration: Tax Filing.

This week on Hull on Estate and Succession Planning, Ian and Suzana discuss tax issues surrounding the administration of an estate.

Comments? Send us an email at hullandhull@gmail.com, call us on the comment line at 206-457-1985, or leave us a comment on the Hull on Estates and Succession Planning blog.

Issues in Estate Administration: Tax Filing - Hull on Estate and Succession Planning Podcast #110

Posted on April 29^th, 2008 by Hull & Hull LLP

 

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #110 of our podcast on Tuesday, April 29^th, 2008.

 

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

 

Suzana Popovic-Montag: Hi it’s Suzana Popovic-Montag.

 

Ian Hull: Ian Hull.

 

Suzana Popovic-Montag: And welcome to our podcast. We would just like to take this opportunity at the very beginning to remind you of the fact that we have a call in number for any of our listeners who have any comments on our podcast. Please feel free to call us at 206-457-1985.

 

Ian Hull: And also I encourage you to send us an e-mail at hullandhull@gmail.com or check out or daily blog which is easily found from our webpage at hullandhull.com.  Well let’s start working through some issues on the estate administration.

 

Suzana Popovic-Montag: That’s great Ian, we shall, but I just wanted to take a quick opportunity to let our listeners know that by the time this podcast is up, you will have done yet another appearance on a great show that’s called “Strictly Legal”, that is hosted by Michael Cochrane and for people who are interested in hearing Ian speak about issues of Estate and Trust matters in a more general all encompassing fashion, I highly recommend you to that show.

 

Ian Hull: Well thanks Suzana, its fun, it’s a great show. I’m looking forward to it. It’s thrown up on a video stream after on Business News Network, BNN Network so, it’s good fun.

 

Suzana Popovic-Montag: Good for you Ian.

 

Ian Hull: Alright, so where we left off in our last podcast was we were still struggling through some tax stuff because it is tax time here in Canada.  So we get a little focused on that and the easiest, I find, with files, the easiest criticism of any executor administering an estate is that they botched the tax filings or did any of the tax related stuff and so let’s talk a little bit about that.  But also let’s talk about the fact that, you know, again, if you’re not the expert in the tax side of things, get help.

 

Suzana Popovic-Montag: That’s for sure.

 

Ian Hull: So we mentioned the T1 terminal income tax return which is due and then we talked a little about how you dovetail in an interim distribution encouraging the party, the executors, I try to encourage my client, the executors. to get the money flowing as quickly as possible, knowing the restrictions that are out there, because there are some, we can’t just simply send it out.  But as soon as is safe, send it out with sufficient holdback. One of the reasons for the holdback is, of course, we have to pay taxes.

 

Suzana Popovic-Montag: And in addition to the T1 terminal return an estate trustee is going to prepare annually a T3 estate tax return.

 

Ian Hull: And that’s on estates that are not immediately distributable, so that if the assets are generating income, or there is a trust that is ongoing, or you just didn’t get it filed, the estate administered in the first year, Revenue Canada still wants their tax money on those, on the interest income or the growth and so forth.  So our annual T3 estate return needs to be filed, and that is approximately, again you can expect a Notice of Assessment  approximately six to nine months after that.

 

Suzana Popovic-Montag: One of the other things that we suggest to our clients to keep in mind after these tax returns have been taken care of, is to consider and to confirm that all CPP death benefits, that’s the Canada Pension Plan death benefits, have in fact been received on behalf of the estate.

 

Ian Hull: And also here in Ontario, we are forced to consider the issue of additional estate administration tax being paid.  And on this point, I was in Court the other day, not a case that I was involved with, but I was watching and I noticed that there was some argument between the government of Ontario and a big, it looked like a big estate, I didn’t follow all the details, but they were arguing over a refund.  The estate had, in fact, filed, and it turned out they had overpaid, they just basically overestimated the value of a big, big property, paid tax on it, the administration tax on it and then were now going back to the Court to work out a mechanism to get a repayment.  So, as is in life, possession is nine- tenths of the law. It reminded me of the adage that, you know, its always better to be conservative when you are making the filings, on the estate administration tax side because it can be more difficult  to get the money back than it can be to pay the money.  But obviously always being honest throughout the process.

 

Suzana Popovic-Montag: That’s good advice, Ian.

 

Ian Hull: I think really at this point, I just want to take a deep breath and look back at what we are doing because, and this is where some clients, we meet some resistance from clients because they sort of see us as trying to cover off too much sometimes. But I really, I often at this point will sit down and prepare a comprehensive reporting letter.  From our standpoint, for sure, we will report throughout.  But this is a good time also for the beneficiaries to receive something in writing directly from the executor.  There is nothing like personal contact, ongoing phone calls is a great idea as well.  Just keeping people up to date, keeping the process personal.  Because this is personal, this isn’t a business transaction, this is a life transaction.  So I always encourage my clients who are executors to pick up the phone or grab a coffee with some of the beneficiaries or even have an informal meeting with them at the local coffee shop.  But most importantly, I also suggest to them that they prepare a reporting letter.

 

Suzana Popovic-Montag: That is really good advice, Ian because it gives people then an opportunity to sort of see in writing all the hard work that you have done as an executor and the benefit of that, of course, being at the end of the day, when you want to seek compensation for your work as an estate trustee, you will have something to point the beneficiaries to in terms of the work and the hard effort that you have put forward in administering the estate.

 

Ian Hull: And it really is, it is not just self-serving, I think it is a natural reaction for people to, who feel that they are in the dark, no matter what you are dealing with, in business or, and in this case what is often a family situation.  Dialogue and communication is so crucial and so the more, the better.

 

Suzana Popovic-Montag: And then just sort of to wrap up the tax discussion that we had we want to turn our minds to the final income tax return and the preparation of that final T3, and then, of course, applying for the final Clearance Certificate in order to give the sort of seal of approval to all the tax filings that have been done to the estate trustee on behalf of the estate.

 

Ian Hull: Okay, so let’s talk this through a little bit because this is really the final bell for the tax filings, and this final T3 return and the final Clearance Certificate application is so important. Again, I typically will tell my clients unless they are the tax experts that I am not, make sure you send everything to the accountant.  This is the last chance to have sent all of the paper that you think might possibly relate to any of the assets of the estate to the accountant, let them decide what needs to be put to the taxing authority, not you.

 

Suzana Popovic-Montag: And then, of course, file the return, pay any taxes owing and just make note of the fact that you want to follow up the actual receipt of the Notice of Assessment for that final T3 return and typically that will come in about six to nine months.

 

Ian Hull: And then, of course, we have the second step and that is, of course, we will be looking for a Clearance Certificate.  But one of the things that people talk about, and without getting overly technical on the tax side, is what do you do when you want to wind up an estate because interest is always going to be accumulating?  And there is an easy answer, again not for my abilities to follow through on the mechanics, but the concept that: say there is a $100,000 left in the bank and you are holding that back to get your Clearance Certificate from CRA.  You filed your final T3 return, everything is really ready to go but there is this one remaining amount of money that is being held back because the accountant said look, you know what, this is a busy account and this individual did a lot of transactions over his lifetime and CRA could always come back and look, and that final look at the Clearance Certificate time, because we have to remember CRA, that’s the last kick they are going to get at it too.  So they typically take a pretty good, careful look at all of the tax activity of the deceased at that time.  But what you can do is, you can allocate the interest income that is being accumulated on the stop date.  So you, say you have some money left, you want to stop the estate, basically stop the clock running, so that you can indeed say it is over to Revenue Canada.  The go forward income accumulation just gets allocated to the beneficiaries.  And as I say, there are certain forms that get filed with the Revenue Canada and so forth to make that happen.  But it is an important step to allow you to bring close to the ongoing treadmill of interest income that is going to be coming in on the money you are holding.

 

Suzana Popovic-Montag: And that is a really good point to address in the letter that you write to the beneficiaries reporting on the administration of the estate and reminding them that at that point, that stop clock date or whatever you want to call it, at that point forward they have an annual obligation to themselves report that income and pay tax on it.

 

Ian Hull: And so now we are looking for that Clearance Certificate.  And even if that, as I say, the final distribution hasn’t been made, so you write a letter to CRA, you wait typically, it’s difficult to guess, it might be six to nine months, it might be more depending on the circumstances.  And once you receive that final Clearance Certificate you can send out your final distribution. 

 

Now one little twist, just as a final comment on the tax side is, is that you want also, I remind my clients to look at whether or not the deceased was a G.S.T. participant or registrant, because there can be special filings that need to be undertaken for that, and make sure that that’s been closed.  So your loop is closed fully on the tax side, you’ve diarized them and then in our next podcast, we are going to talk a little bit about the accounting obligations, not from the standpoint of the government, which we have gone through, it’s going to be hopefully no more tax time once we get in our next podcast, we are going to move into the accounting obligation as between the executor and the beneficiaries.

 

Suzana Popovic-Montag:  Well that is great, Ian.  Thanks very much.  I look forward to our next podcast.  And just a reminder again for anyone who has any comments about our podcast, please feel free to call us at 206-457-1985 or send us an e-mail at hullandhull@gmail.com or, of course, visit our blog and our webpage at estatelaw.hullandhull.com.

 

Ian Hull: Thanks Suzana.

 

Suzana Popovic-Montag: Thanks Ian.

 

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

 

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

 

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

 

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Listen to Alter Ego Trusts.

This week on Hull on Estates, Natalia and Chris discuss what Alter Ego Trusts are and the pros and cons of using Alter Ego Trusts.

Comments? Send us an email at hull.lawyers@gmail.com, call us on the comment line at 206-350-6636, or leave us a comment on the Hull on Estates blog.

Alter Ego Trusts - Hull on Estates Podcast #107

Posted on April 22^nd, 2008 by Hull & Hull LLP

 

Natalia Angelini: Hello and welcome to Hull on Estates. You’re listening to Episode #107 on Tuesday, April 22^nd, 2008.

 

Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada.   Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and Wills.  Now, here are today’s hosts.

 

Natalia Angelini: Hi and welcome to another episode of Hull on Estates. I’m Natalia Angelini.

 

Chris Graham: And I’m Chris Graham.

 

Natalia Angelini: So Chris, welcome today. We’ve never podcasted before although it feels like we have.

 

Chris Graham: Many times Natalia, but I’m sure it will be a pleasure.

Natalia Angelini: Yes I think it will and today we’re talking about a subject that is quite interesting. We’re going to cover the issue of alter ego trusts. Now alter ego trusts are a newer instrument and it’s a type of trust that satisfies certain requirements under the Income Tax Act and which are defined in Section 248 of the Income Tax Act. So perhaps I’ll just start by setting out some of the requirements for an alter ego trust. Chris, you can feel free to jump in any time here.

 

So this is the kind of trust that is really appropriate for an older person because the settlor has to be at least 65 years of age at the time the trust was created. And the trust must have been created after 1999.  So it is, as I said, a newer type of trust instrument. The settlor also has to be able to receive all of the income of the trust that arises before his or her death and no one except the settlor may, before his or her death, receive or obtain the use of any income or capital of the trust. And I think finally the trust does not make an election referred to in the Income Tax Act and that’s, for anyone who’s interested, that’s in sub-paragraph 104, sub 4a, sub 2.1 of the Income Tax Act.

 

Chris Graham: That was a mouthful.

 

Natalia Angelini: That was a mouthful, I’m sure we’ll all be rushing to go look up the Section.

 

Chris Graham: Applies to pretty much any reference to the Income Tax Act.

 

Natalia Angelini: Exactly. So those are the requirements for an alter ego trust to exist and perhaps we can chit chat about some of its other elements.

 

Chris Graham: Yeah, I guess the first element that any lawyer will know, but people should also be aware of, is that a trust, including an alter ego trust, is a separate tax payer. For the purposes of paying taxes, it is its own person.

 

Natalia Angelini: That’s right Chris, good point. What else makes the alter ego trust distinct?

 

Chris Graham: Well, the rule against perpetuities which non-lawyers call the 21 year rule, some lawyers do too, of course, better than me, does not apply to deferral of capital gains tax until the settlor dies or until the capital property is disposed of during the settlor’s lifetime. So basically, if the settlor lives past age – say they create the trust at 65 and they live past age 86 which a lot of people are these days, well the rule against perpetuities in other trusts might kick in. It doesn’t kick in to the alter ego trust.

 

Okay, so in short, what happens is that on the death of the settlor, there’s a deemed disposition of the assets that are in the trust and capital gains taxes cannot be – they can’t be set against the settlor’s capital losses or capital losses in the trust can’t be set against the settlor’s capital gains. Since the trust is, it’s an inter vivos trust which means during the lifetime of the settlor, gains will be subject to tax at the highest applicable marginal rate.

 

Natalia Angelini: And that’s a good point and I think essentially income earned in the trust will be taxed as if the settlor earned it personally during his or her lifetime. So even though the 21 year rule does not apply, the trust can make an election under the Income Tax Act not to have a deemed disposition on the death of the settlor. So if that election is made, the 21 year rule will apply and there won’t be a rollover with respect to transfer of assets into the trust. And I think there’s one other element to an alter ego trust that we should cover.

 

Chris Graham: Yes, residence is a basic general rule, residence of the trustee will determine the residence of the trust, I think that’s pretty much trite in most cases. However here’s where the kicker comes in. If the trustee becomes a non-resident, the trust will also be deemed, in many situations, to have also ceased to be a resident of Canada and must therefore pay the deemed disposition of its assets. Now why does that matter? Well who makes these trusts? People at least 65 years of age, with a fair bit of money. What do most of those people do in the winter? They pack their bags, they’re smart people, they avoid our winters. They go down to Florida. And therein lies the risk of being deemed to have become a non-resident. We’re not immigration lawyers, we’re far from being experts in legal requirements of residency and what deemed rules are and when they kick in.  But we do know there’s something out there and if you create one of these trusts or you certainly have to keep this in mind and get some highly qualified advice.

 

Natalia Angelini: Now I’d like to cover some of the reasons that you would want to set up an alter ego trust because this is a kind of trust instrument that is, in my view, appropriate for a narrower scope of people and not as broad an audience as some other trust vehicles. I think its best when you’re dealing with a really large estate because the best or what seems to be the best advantage to setting up an alter ego trust is avoiding probate tax. So if you’ve got a large estate and you’re potentially going to be paying significant sums in probate tax and those sums are .5% on the first $50,000.00 and 1.5% on the balance of the value of a person’s estate. So those numbers can really add up.

 

And one of the other great advantages of an alter ego trust is the privacy factor. The value of your assets are not made public. So if that’s important to you, then that’s one advantage of that vehicle. And something else that you can benefit from by creating an alter ego trust is creditor protection, because ownership of the asset is transferred to the trustee. However you’ve got to be careful because if it’s ultimately challenged and the purpose of the trust is found to have been set up to avoid or defeat creditors, then those assets can be clawed back and you won’t be able to protect them against creditors.

 

Chris Graham: Absolutely, Natalia. Federal and provincial statutes, for instance, the Fraudulent Conveyances Act contain lots of very powerful ways that creditors can go after debtors who tried or purported to enter into transactions for the sole purpose of protecting assets from claims. That’s something obviously you have to get expert advice on because it’s a case by case basis and the statutes are complex and there’s lots of case law and all the rest of it. But if you’re looking to create an alter ego trust to defraud creditors or whatever, that’s not something that they were really set up for.

 

Natalia Angelini: And I think one of the other advantages to setting up an alter ego trust is the prevention of litigation because it is more difficult to challenge the validity of an inter vivos trust than a Will, for instance. So that is something to be kept in mind.

 

Chris Graham: And one practical advantage of it, probably not really what this type of trust is designed to do, but if the settlor settles this trust, an alter ego trust, and then later becomes incapable, well that particular – the assets in the trust are self-administering. In other words, no one has to go to Court and initiate expensive and potentially contentious guardianship proceedings in order to deal with this property. You don’t have to worry about “oh my god, this person who’s been running this company is suddenly out of the picture, what do we do? Everything’s falling apart”. No, it’s taken care of, it’s in trust, there’s a trustee, these assets are well in hand and they’re also being managed in accordance with a plan laid down by the settlor already.

 

Natalia Angelini: So I can’t think of any other reasons for setting up a trust off the top of my head, so maybe we’ll move to reasons that you might not want to set up an alter ego trust.

 

Chris Graham: One of the major reasons not to, is that when you put something into an alter ego trust or any trust, you lose control of that asset, it no longer belongs to you.  And it never ceases to amaze me how many people who have set up estate freezes and what not, don’t appreciate that fundamental point. It is no longer theirs when it goes into trust, whatever it is.

Natalia Angelini: That’s right.  So you certainly have to be mindful of that and if, on the other hand, you do appoint yourself as trustee being the settlor, you can retain some control but you’ll forfeit your right to use the trust to reduce overall tax liabilities. So there’s a pro and con to proceeding in that way as well.

 

Chris Graham: This brings us back to what we were saying earlier about not being able to write off capital gains based on maybe the settlor’s capital losses on death. There’s also that aspect of tax planning, which is way beyond me.

 

Natalia Angelini: I’ll leave that one alone. So onto – another reason that you might hesitate to set up an alter ego trust is naturally there’s going to be legal costs and costs of obtaining tax advice.  For instance, ongoing administration expenses, trustee fees and the cost of annual tax returns that need to be filed. So those are just some of the costs built in that, you know, may not be – some people may not be interested in incurring.

 

Chris Graham: I thought people liked paying their lawyers, their accountants, their dentists.

 

Natalia Angelini: Yeah I don’t think –

 

Chris Graham: Their financial advisors.

 

Natalia Angelini: So I think we’ve covered the nuts and bolts of an alter ego trust meaning what it is, what its elements are, the advantages and disadvantages of setting one up. And they certainly are, you know, a welcome edition to the tools available to people in planning their estates, particularly for the older client. However, the advantages of confidentiality and probate tax savings definitely needs to be weighed against the tax considerations and potential tax disadvantages to setting up the trust.

 

Chris Graham: It is a state-of-the-art statutory trust and as such, contained in the Income Tax Act, and as such it has a broad variety of advantages and disadvantages.

 

Natalia Angelini: If you’re interested in learning more about this subject or just in reading more on it, then there’s a couple of great papers that we can refer you to. One is by Elena Hoffstein. It’s called Alter Ego Trusts and Joint Partner Trusts: Tips and Traps. And she presented this paper at the Fifth Annual Estates and Trusts Forum. And there’s also a more recent paper by Tim Yuden, called – and it contains an annotated alter ego trust and that was presented at the Taxation of Trusts and Estates:  A Practical Approach Seminar on March 3^rd, 2008. So those are two great sources that we’ve certainly referred to in putting on this subject today and we hope that they help you as well.

 

Chris Graham: It’s nice light reading, too.

 

Natalia Angelini: Nice light reading. So I think that brings us to the end of our discussion this week. Thanks for listening and thanks for joining me,Chris.

 

Chris Graham: That was a pleasure, Natalia. I look forward to podcasting with you again soon, as always.

 

Natalia Angelini: Me too! So perhaps one thing we can leave you with is we’d be happy to hear from you, so you can send us an e-mail at hull.lawyers @gmail.com. Or give us a call at our comment line being: 206-350-6636.

 

Alternatively, you can also visit our blog page at estatelaw.hullandhull.com where you’ll get even more information and discussion on today’s practice of estate law. I hope you enjoyed the show. I’m Natalia.

 

Chris Graham: And I’m Chris.

 

Natalia Angelini: And until next time, so long.

 

This has been Hull on Estates with the lawyers of Hull & Hull.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

 

To listen to other podcasts, or to leave a question or comment, please visit our website at www.hullandhull.com.

 

Our theme music is Upper Structure by DJ AKid  and is courtesy of the Podsafe Music Network.

 

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As we all know, it is not uncommon for any investor to occasionally experience a substantial decrease in the value of one of the stocks in his or her portfolio.  But what if the investor is a trustee?   

In light of the recent amendments to the Trustee Act which appear to embrace the modern portfolio theory, it will be interesting to see how the Court will utilize this theory to assess a trustee's investment performance. Section 28 of the Trustee Act adopts an approach that is consistent with the modern portfolio theory.  Under this section, a trustee is insulated from liability if “the conduct of the trustee, which led to the loss from the trust, conformed to a plan or strategy, for the investment of the trust property, comprising reasonable assessments of risk and return that a prudent investor could adopt under comparable circumstances”.

Under the “statutory legal list” approach, which I described yesterday, a trustee was limited to investing trust assets in authorized investments.   However, with the development of the prudent investor rule, trustees are provided with a broader range of investment choices, which will likely increase their responsibility in determining an acceptable standard of care.

Presuming that a trustee is found liable for breaching the standard of care, section 29 of the Trustee Act permits a court to assess “the overall performance of the investments” when it is assessing damages.  Based on the language of section 29, it appears that a trustee may be allowed to offset the loss of a bad investment against the gain of a good investment.

The trusts and estates bar will be watching with interest to see how the judicial consideration of the prudent investor rule evolves.

Happy Super Bowl Weekend!  Go Patriots!

Rick

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In my blog yesterday, I introduced the prudent investor rule as the standard of care for trustees when investing assets that are held in a trust. Today, I will address how a trustee’s investment performance may be assessed.

Prior to July 1999, trustees were required to make investments pursuant to the “statutory legal list” provided for in the Trustee Act. This had the effect of holding trustees accountable for each particular investment, rather then the investment portfolio as a whole. The principle was further illuminated by the anti-netting rule, which stated that a trustee, who committed a breach of trust, was not entitled to set off a gain in one transaction against a loss in another. However, through recent amendments to the Trustee Act, the statutory legal list was repealed and replaced with the Prudent Investor Rule.

The Prudent Investor Rule reflects the modern portfolio approach to investments, the emphasis being on the prudence of the portfolio as a whole as opposed to each particular component. This theory is captured in Section 27(5) of the Trustee Act. Section 27(5) requires “a trustee to consider … the role that each investment plays within the overall trust portfolio”. Furthermore, under section 27(6) “a trustee is required to diversify the investments of the trust property. It appears that under the modern portfolio approach, a trustee would not be breaching the standard of care, should he or she invest a substantial amount of trust assets into a single security. As described above, section 27(6) requires that the trustee consider diversifying the portfolio, which is necessary if the Prudent Investor Rule is to be followed. To conclude my topic, tomorrow I will consider the liability of a trustee with respect to the investment of trust assets.

Thanks for reading,

Rick

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Not all Wills provide for an outright distribution to the beneficiaries. In some cases, the assets of an estate are held in trust over a period of time for the benefit of one or more beneficiaries, sometimes in succession.  When a trustee administers a trust, he or she is entrusted to act for the benefit of others. As such, our common law and statutes impose standards that trustees must comply with when dealing with trust property.

With the recent plummet in the stock market, I believe many trustees are considering how the stock market losses have affected the trust investments and what action they should take in the circumstances. 

Section 27 of the Trustee Act addresses the standard of care for trustees when investing assets held in a trust. Section 27(1) states, “in investing trust property, a trustee must exercise the care, skill, diligence and judgment that a prudent investor would exercise in making investments”. Section 27(2) states that “a trustee may invest trust property in any form of property in which a prudent investor might invest”.

Section 27(1) and (2) outlines the prudent investor rule. When investing trust assets, a trustee must comply with the prudent investor rule to protect himself or herself from liability.   Section 28 of the Trustee Act, emphasizes this point as it states that a Trustee will not be liable for losses arising from investments if the standard of the prudent investor is met. Nevertheless, the issue remains how does a trustee meet the “prudent investor” standard? In keeping with this theme, tomorrow I will address how a trustee’s investment performance may be assessed.

Thanks for reading, and have a great day!

Rick

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Checklists are wonderful things when it comes to the practice of law (list makers would argue that that is true in life as well). In today’s busy practice, a checklist can ease the troubled legal mind.

I was looking at several estate planning information checklists earlier this week. It is worthwhile to highlight some issues/items that can be easily overlooked but which a thorough solicitor should ensure is on his/her checklist:

·         If you are acting for both spouses/partners, advise the clients that you cannot act for one at a later date without the other’s knowledge;

·         Is the estate trustee to manage funds for minors and distribute monies to the guardian for care, maintenance and education of minor children. Who is the guardian;

·         If they can be transferred, who gets air mile/loyalty points. What about transferable equity in hunting/fishing lodges or sports clubs;

·         Joint Assets and the presumption of a resulting trust – is there a clear intention of ownership;

·         For foreign property, consider the necessity of executing a separate will or appointment of a local estate trustee;

·         Ensure every life interest is coupled with a remainder interest; and

·         Ensure any charitable organization named as beneficiary is still in existence and properly described.

Have a great weekend and for all those skiers out there, let it snow, let it snow, let it snow.

Justin

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Listen to Karkus v. Cotroneo 2007

This week on Hull on Estates, Paul Trudelle and Diane Vieira discuss the case of Karkus v. Cotroneo 2007. The case addresses many of the issues that estate lawyers face on a daily basis, such as: proving or disproving gifts, slander of title and the importance of corroborative evidence.

Karkus v. Cotroneo 2007 - Hull on Estates Podcast #93

Posted on January 15^th, 2008 by Hull & Hull LLP

 

Paul Trudelle: Hi and welcome to Hull on Estates.  You’re listening to Episode 93 on Tuesday, January 15^th, 2008.

 

Welcome to Hull on Estates, a series of podcasts for the Canadian legal community dealing with issues and insights surrounding estate planning in Canada.   Hosted by the lawyers of Hull & Hull, the podcast will touch on some key considerations when planning estates and Wills.  Now, here are today’s hosts.

 

Paul Trudelle: I’m Paul Trudelle.

 

Diane Vieira:  I’m Diana Vieira.

 

Paul Trudelle:  Hi Diane.  How are you?

 

Diane Vieira:  I’m good.  How are you?

 

Paul Trudelle:  Very good.  This is our first podcast together and our first podcast of 2008, so I wish everyone a Happy New Year.  And why don’t we get into what we thought we would talk about today.

 

Diane Vieira:  Sure.  This is an interesting case that deals with a lot of things that we deal with in our practice.

 

Paul Trudelle:  Yeah, the case is Karkus and Cotroneo.  It’s a 2007 case, April 19, 2007, out of the Ontario Superior Court of Justice.  It’s a decision of the Honourable Mr. Justice Sheppard.  And I thought that it would be great to talk about this case because it deals with a number of issues that we deal with day in and day out.  It deals with issues such as gifts, proving a gift or disproving a gift, corroborative evidence required, remedies where there is a finding that there was no gift.  It talks about resulting trusts, set-offs, slander of title, costs regarding Certificates of Pending Litigation when those are resorted to early in the litigation, and also costs of the litigation.  So there’s a lot in this relatively short case…11 pages…but I thought we would spend a little time going through some of those issues.   Perhaps we can talk a bit about the background or the facts of the case.

 

Diane Vieira:  Oh, sure.  This is a case where the deceased died without a Will and her daughter was appointed the estate trustee.  The deceased was a business woman and near the end of her life, her business had been failing so there was a number of creditors.  And her daughter, the estate trustee, who is the plaintiff in this action, was looking through her mother’s financial records and an entry in her bank book showed a $65,000 transfer from her mother to her mother’s boyfriend, who’s the defendant in this case.

 

Paul Trudelle:  Right.  And I think just before we go on, I think the fact that the deceased was in some financial difficulty in her business, is an important factor that the Court relies on later on, so that’s important to note.

 

Diane Vieira:  Later on, the defendant admits that he received the $65,000.  His position is that this was a gift.  The daughter’s position is that this represents money that the defendant was holding on behalf of his mother.  A little more explanation to that was that the $65,000 the defendant used to purchase a property.  And then on that property, the defendant’s name is listed alone, but the property is listed as registered as being in trust.

 

Paul Trudelle:  That’s right.  And I think that’s important as well.  The Court deals with the resulting trust claim and looks at that factor, and we’ll talk about that briefly in a second.  So in essence the claim was by the estate for the return of the $65,000 and for a claim that the defendant held a property on a resulting trust and the estate had an interest in that property.  The Court looked at the evidence with respect to the gift and before doing that, set out the test that is required and what the estate must argue or try to establish in order to show that there was a debt or resulting trust and what the defendant needs to show in order to prove that there was in fact a gift.

 

Diane Vieira:  I just wanted to…another point of fact is where the $65,000 came from and when it was transferred.  The deceased had sold her house and she was moving in…she moved in with her boyfriend, who is the defendant.  And the $65,000 represents the proceeds of the estate…the proceeds of the sale of the house, excuse me.  And the money wasn’t gifted or transferred to the defendant until six or seven months later on, which is something that the Court reflected on.

 

Paul Trudelle:  That’s right. They looked at the fact that the parties had moved in together, the $65,000 was used to, in part, to purchase this house and make renovations that the plaintiff wanted.  The Court considered the fact that the onus is on the defendant to prove, or the recipient to prove that this was a gift, there was no presumption that would work in his favour.  And in fact, the presumptions which aren’t really referred to, would be the opposite, that there was a resulting trust or the money was owed back to the estate.  And the Court found ultimately that the defendant wasn’t successful in proving that this was a gift.  His evidence was that the money was used…was given to him to help with the purchase of the house and to pay for expenses and that was contrary to a finding of a gift.  Just another point on that - the Court refers to the evidence required in order to establish a claim by or against an estate and dealt with the issue of corroborative evidence.  Perhaps we can talk a bit about what corroborative evidence is required and what the rule is there.

 

Diana Vieira:  With respect to corroborative evidence, Section 13 of the Evidence Act requires that there be some corroboration of the material evidence.  And the onus is the civil litigation onus, but with corroboration.  And in this case, the judge and the Court had problems with the defendant and the plaintiff’s evidence.  He called that evidence unreliable.

 

Paul Trudelle:  Right.  He felt that the evidence of the parties was of questionable credibility and in the absence of any corroborative evidence, he wasn’t able to find that there was in fact a gift.  And as you mentioned, the Court referred to the burden on the defendant to prove it but said that there was also what he said was a healthy scepticism in addition to that.  Now there’s other cases that talk about whether there’s a higher burden on a party.  The burden is still the civil burden but the Courts will look at these claims with some scepticism.

 

So the result of the defendant’s failure to prove that it was a gift meant that money was owing to the estate.  The Court went on to deal with the issue of whether the estate had a trust claim against the defendant.  And the Court dismissed the trust claim for a number of reasons.  The first reason, or one of the reasons was that in establishing a trust, there is case law to the effect that evidence of an illegal scheme will not be received to support a resulting trust.  And the illegal scheme that the Court referred to here was the fact that the monies were transferred by the deceased to the plaintiff probably for the purpose of avoiding creditors.  And as a result, they had…the Court had a difficult time in finding that the estate could rely on the doctrine of resulting trust in these circumstances.   So how did the Court deal with the money owing to the estate then?

 

Diane Vieira:  The Court goes on to find that the defendant does owe money to the estate.  It’s a debt to the estate.  And he then goes on to discuss the concept of unjust enrichment.

 

Paul Trudelle:  Yeah, and the Court found that the money was owing to the estate and I guess the defendant had assets here.  The Court felt that it wasn’t necessary, in fact, to rely on the concept of trust or impose a trust over the property owned by the defendant.  A judgment, a monetary judgment, was sufficient.  You mentioned the unjust enrichment part of it and the Court talked a bit there about when they will find unjust enrichment in order to bring in the equitable remedy.

 

Diane Vieira:  Yes, the Court refers to the Supreme Court of Canada case, Peter vs. Bellow and the three steps that are needed for a finding of unjust enrichment.  And all three were here in this case.  There was an enrichment on behalf of the defendant receiving the $65,000 and a corresponding deprivation to the deceased, now the estate of the deceased, and then an absence for the reason of this enrichment.

 

Paul Trudelle:  Yeah, but having found all of those circumstances present, the Court still goes on to say that they won’t impose the equitable remedy of a constructive trust.  The Court refers to that Supreme Court of Canada decision and extracts a point to the effect that a monetary award would be the appropriate remedy in many cases, and that was the case here.  And the Court concludes that a monetary award is appropriate and makes an Order that the defendant pay back the $65,000 to the estate.  However, he doesn’t end there.

 

Diane Vieira:  No, it’s…the Court goes on to find that the estate is not entitled to that full $65,000 because the defendant did provide something in the excess of $20,000 in renovations to the house.  And if the deceased’s $65,000 was in a gift to the defendant, then the money that he contributed to the relationship was also not a gift. 

 

Paul Trudelle:  That’s right.  So in effect, they awarded the defendant…they made an award in favour of the defendant with respect to his Counterclaim for money that he said he spent on behalf of the plaintiff, and that reduced the recovery by the estate.  There is also the issue of a claim by the defendant for slander of title.  The defendant alleged that a Certificate of Pending Litigation put on his property was slander of title, and the Court dealt with that in very short order.

 

Diane Vieira:  Yes, the Court found that the plaintiffs did not…didn’t have a credible position to have had that Certificate of Pending Litigation registered.  And consequently they awarded the money that the defendant had spent on removing that Certificate, credited back to the defendant.

 

Paul Trudelle:  That’s right.  And finally, on the issue of costs of the action itself, the Court considered the fact that the plaintiff had some success, made recovery for the estate.  However, it didn’t establish its claim for resulting trust.  The Court also felt that the evidence of the witnesses was unreliable to a certain extent and in fact in some parts the judge said that in some parts, the evidence was fabricated.  And as a consequence of that he ordered that there be no order as to costs, and each party had to bear its own costs.

 

Well, I think that’s an interesting case on a number of grounds.  We’ve touched on a few of the points that the case deals with.  I recommend the case highly to anyone dealing with those types of situations where there are gifts, where you’re considering a claim for a resulting trust, an interesting counterclaim where you’re faced with a claim for the return of a gift or money advanced on the basis of benefits provided to the deceased, and also considerations for dealing with Certificates of Pending Litigation and the costs that may be involved in that.

 

Well thank you very much, Diane.

 

Diane Vieira:  Thanks Paul.

 

This has been Hull on Estates with the lawyers of Hull & Hull.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

 

To listen to other podcasts, or to leave a question or comment, please visit our website at www.hullandhull.com.

 

Our theme music is Upper Structure by DJ AKid  and is courtesy of the Podsafe Music Network.

 

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